Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Gold Miners Profits
Transcript
- Lucas: So gold is up more than three percent this week, gold-miner stocks are up nearly eleven percent, and yet the companies digging the stuff out of the ground are watching their margins get squeezed by inflation. That's the disconnect we're chasing today. Luna: Wait, gold miners are up double digits while gold is up three percent. That seems like a good thing, doesn't it? Normally miners give you leverage to the metal. Lucas: Leverage cuts both ways. The market's pricing in higher future gold prices, sure. But underneath that rally, the cost side is quietly eating into those gains. I'm talking about the diesel to run the haul trucks, the steel for the crushers, the wages for the geologists and the drill crews. All of that has been inflating. Luna: So the headline number looks great, but when you open the hood, the engine's running hot. Lucas: Exactly. And the metric that captures this is something called all-in sustaining costs, or AISC for short. It's the industry's standard for what it actually costs to dig up an ounce of gold and keep the mine running. And if that number rises faster than the gold price, your profit per ounce shrinks, even when the gold price is climbing. Luna: Where are AISC numbers right now? Are we talking about a big squeeze? Lucas: We don't have exact second-quarter reports in front of us, but the trend has been pretty consistent. Over the past couple of years, miners have been reporting higher AISC, partly because of inflation in inputs and partly because ore grades are declining at some older mines. Gold's at four thousand five hundred sixty-four dollars an ounce, which is a record, but if your all-in cost goes from twelve hundred to fifteen hundred an ounce, your margin per ounce just dropped by three hundred dollars. Luna: That's a huge chunk. And you're saying that's what's happening even as the gold price is soaring? Lucas: Right. And the market sees it. That's why gold-miner stocks like the GDX ETF have been volatile. They're not just a pure play on gold; they're a play on the spread between gold and costs. If costs keep climbing, that spread gets thinner, and all that leverage works against you. Luna: So how do you actually check whether a miner is handling inflation well? I mean, as an investor, what do you look at? Lucas: The AISC number is the first thing. But you also want to see how it's trending quarter over quarter. If a miner's AISC is flat while the gold price is up, that's a good sign. If it's rising faster than the gold price, that's a red flag. And then you look at the cost curve across the industry. The miners at the bottom of the cost curve, the ones with the lowest AISC, they're the ones who can weather inflation better. Luna: So it's like the cost curve in any industry. The low-cost producers win. Lucas: Exactly. And that's why you see Barrick and Newmont, the big names, get attention. They have scale and often lower costs. But even they have to deal with things like rising energy prices and labor shortages. It's not just about gold going up anymore. Luna: And speaking of the macro picture, we just got the Fed minutes yesterday, and they were talking about a potential rate hike if inflation doesn't cool. How does that play into this? Lucas: That's the other side of the coin. A rate hike would typically strengthen the dollar and put downward pressure on gold, because gold doesn't pay interest. But if inflation stays sticky, gold's appeal as a hedge increases. So you have these two forces pulling in opposite directions. And that's why gold miners are so volatile right now. They're caught in the crosscurrent. Luna: So for the average person, what's the takeaway? I mean, not everyone is going to buy a gold-mining stock. Lucas: The mental model applies beyond gold. Look, if you own any investment, whether it's a rental property, a small business, or a stock, you have to understand how inflation affects both your revenue and your costs. Gold miners are just a clear example. But the same logic works for a coffee shop: if your coffee bean costs go up faster than your prices, your margin shrinks. Gold miners show you that in really stark terms. Luna: That's a good point. And you know, it reminds me of something from our earlier shows on how inflation eats your emergency fund. It's all about purchasing power, but here it's about production costs. Lucas: Right. And on that note, if you've been following our conversations and they've helped you think about your money differently, we'd be glad if you considered supporting the show. We keep it ad-free, and listener support is what makes that possible. You can do that at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep the conversations going. And we appreciate every bit of it. Lucas: So back to gold. Let's talk about what this means for your own portfolio. If you're thinking about gold miners as an inflation hedge, the key is to remember that they're not a pure hedge. They're a leveraged bet on the gold price minus costs. And in an inflationary environment, costs are rising along with the gold price. So you have to be selective. Luna: Selective how? Lucas: Look for miners with low all-in sustaining costs, strong balance sheets, and a track record of controlling costs. Avoid the high-cost producers that are barely scraping by. And pay attention to the cost curve. If a miner is in the top quartile of costs, they're going to get hurt more in a downturn. Luna: Any specific examples? I mean, I know you mentioned Barrick and Newmont. Are there others? Lucas: There are mid-tier and junior miners that can offer more upside, but also more risk. The key is to do your homework. And then, of course, you have the GDX ETF if you want broad exposure. But remember, even the ETF is still subject to that cost squeeze. Luna: So it's not just about gold going up. It's about the cost of getting it out of the ground. Lucas: Exactly. And that's the angle we haven't talked about enough: the cost side of the gold trade. Everyone focuses on the gold price, but the miners' profits are what matter. And inflation is directly eating into those profits. Luna: And with the Fed potentially hiking, that could put more pressure on the dollar, which could boost gold, but also boost input costs, right? Lucas: That's the paradox. A rate hike might strengthen the dollar, which would be bearish for gold, but if inflation stays high, input costs keep rising. So you have these competing forces. It's a delicate balance. Luna: So what's your bottom line for someone listening today? Lucas: Understand that gold miners are not a simple inflation hedge. They're a bet on the spread between gold prices and all-in sustaining costs. And in an inflationary world, that spread is under pressure. So if you're going to invest, do it with eyes open to the cost side. And if you're just using gold as a hedge, maybe stick with a gold ETF like GLD, which is up three percent this week, and which avoids the operational risks of mining companies. Luna: That's a good distinction. And it's a great reminder that inflation doesn't just eat your cash; it eats corporate profits too. Lucas: And that's the thing—whether it's your emergency fund, your streaming subscriptions, or a gold mine, the same principle applies. Inflation is a hidden cost that erodes value. The question is, are you paying attention to it?